Question

# a. find a price of Bond A, a 1-year zero-coupon bond, which has a return of...

a. find a price of Bond A, a 1-year zero-coupon bond, which has a return of 6.6% and a face value of \$1000. Show calculations and formula.

b. would you prefer Bond A to Bond B, a 1-year zero coupon bond which sells for \$ 910 and has a face value of \$1000, show and explain.

c. would you prefer Bond A , Bond B or Bond C is a 1-year zero coupon bond with face value of \$500 and sells for \$470, show and explain

(a) If Bond price be P, then

P x 1.066 = \$1,000

P = \$1,000 / 1.066 = 938.09

(b) If return on bond B be R% per year, then

\$910 x (1 + R) = \$1,000

1 + R = \$1,000/\$910 = 1.0989

R = 0.0989

R = 9.89%

Since return on bond B is higher than return on bond A (9.89% > 6.6%), I will prefer bond B.

(c) If return on bond C be R% per year, then

\$470 x (1 + R) = \$500

1 + R = \$500/\$470 = 1.0638

R = 0.0638

R = 6.38%

Since return on bond B is highest than return on bond A (9.89% > 6.6% > 6.38%), I will prefer bond B.

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